Earlier quoted context omitted.
Here's the fun part, if I start a company and get my friend to invest $1 for 0.0000001% of my company. What's my company's "valuation"? "Valuation" is such a terrible term, all it really means is "the ROI expected by the investors". We try to make it very complicated with analysis of term sheets and growth rates and all that, but it's just a gamble on the part of the investor. The only difference between gambling and…
> Here's the fun part, if I start a company and get my friend to invest $1 for 0.0000001% of my company. What's my company's "valuation"? This is a great point, but valuation is still a meaningful term, it refers to how much someone thinks the company is worth. Your friend bet $1 that your company is worth more than $10,000,000. We tend to trust people's opinions when they put their money where their mouth is so we p…
The problem is that no investor is an oracle, and no matter the size of their investment, or what statements they make, can actually make a company have some value until it's sold.
At best you can gauge a company's "value" (not valuation) by their revenue and profit, this is an instantaneous assessment backed by hard figures. And you can make a projection, which is a best guess, of the future value of the company based on period over period growth and some notion on how big the market is. But we also don't know what kind of fanciful numbers were being used.
Suppose my friend starts a company making internet connected toasters. Well everybody likes toast, therefore size of market = humans on earth. No! You'd be surprised at how unscientifically figures for market size are determined.
Here's one I've actually heard for a piece of high-end technical software targeting the Federal government: The U.S. Federal Government employs about 5 million people, if we sell a copy of our software to each employee at $3k/license our market is worth $15 million dollars! And then they're very surprised when the market does not turn out to be that big, and there's a mad last minute scramble to target local government because "there's way more local government than there are federal government".
Remember the Segway? They actually hired a professional consulting firm to gauge market size. You know what was predicted? 31 million units inside of 10 years and 50,000 in the first year. Money exchanged hands for this prediction. Valuations were made based on this work. This was supposed to be a company the size of Apple. How many have actually been sold? Nobody knows, but it appears to be well under 50,000, worldwide.
But people in suits said this stuff! With nice hair and fancy diplomas on their walls! If I can't trust them who can I trust?
I'm not saying figuring out market size is easy, it's hard. So hard that it's wrong far more often than it's right (something like 90% of businesses fail). "Valuation", of which market size should be a critical component, is misleading and not particularly meaningful. And the problem is that we take unmeaningful words like that and turn them into major news.